OTTAWA — After months of uncertainty, the economic recovery now appears to be “solidly entrenched,” the Bank of Canada said Tuesday, indicating its forecast for growth should unfold as envisaged.

Still, in its latest interest rate announcement, the central bank reiterated, as expected, its conditional commitment to keep its key policy rate at a record low 0.25% until June 2010 as inflation is still not expected to hit its preferred 2% target until the second half of 2011.

Recent data – from retail sales to a stunningly strong jobs report for November — have painted a mostly cheer picture of the Canadian economy, analysts say, even though third-quarter GDP growth of 0.4% annualized came in well below the central bank’s 2% expectation.

Since the central bank’s latest economic forecast in October, “global economic developments have been slightly more positive and the global outlook has improved modestly,” the bank’s governing council said in its statement, adding though that “significant fragilities” remain.

The central bank said the composition of economic growth is unfolding as expected, highlighted by a shift toward stronger domestic demand and less reliance on exports.

“The main drivers and the profile of the projected recovery in Canada remain consistent with the bank’s [outlook],” it added. “The bank continues to expect economic growth to become more solidly entrenched over the projection period and inflation to return to the 2% target in the second half of 2011.”

According to the central bank’s outlook, Canada is expected to grow 3.3% this quarter, followed by expansion of 3% next year and 3.3% in 2011. Predictions for strong growth gained steam late last week when data indicated the Canadian economy added 79,000 jobs in November.

Further, the central bank on Tuesday played down the impact of the stronger dollar, even though it acknowledged it remained a key risk to its forecast, and “could act as a significant further drag” on growth and inflation. The stronger loonie, which has advanced as much as 25% this year against its U.S. counterpart, led to a surge in imports in the third quarter – resulting in net exports acting as a drag on the economy of roughly 5.3 percentage points.

Since the last rate announcement, however, the dollar has on average traded a couple of cents below the central bank’s working assumption of a US96¢ loonie.

Most analysts were looking for any change in nuance in the bank’s statement – in particular a hint or two that it might move before its conditional pledge to keep rates at a record low until June 2010 given the surge in domestic consumption as households take advantage of record low borrowing costs.

Instead, the central bank reiterated that its target rate of 0.25% “can be expected” to remain intact until the end of the second quarter of next year. The pledge is conditional on inflation hitting the 2% target in the third quarter of 2011, as the bank expects.

The last time the bank raised its key policy rate, to 4.5%, was in July of 2007 – and shortly afterward the first signs of the credit crisis emerged.

Some economists, such as Ryan Brecht of Action Economics, expect the central bank to begin hiking its policy rate, and aggressively, starting in the second half of next year.

In a note released Tuesday morning, Mr. Brecht, the firm’s senior North American economist, said he envisaged the Bank of Canada raising its target rate by 175 basis points before December of 2010, for a policy rate of 2%, or “more normal levels.” Still, that would be below the 3% level in September of 2008, when Lehman Bros. collapsed, or the 4.5% peak hit more than two years ago.

Financial Post

In the second half of 2007, the Canadian economy grew broadly in line with
the Bank’s expectations in the October Monetary Policy Report (MPR). Despite
some slowing in growth in the fourth quarter, the Canadian economy continues
to operate above its production capacity. Both core and total CPI inflation
have been lower than projected in the MPR, largely reflecting a price-level
adjustment related to increased competitive pressures in the retail sector
stemming from the level of the Canadian dollar.

Financial market conditions have deteriorated since October, leading to a
tightening of credit conditions in industrial countries. Given this, and a
deeper, more prolonged decline in the U.S. residential housing sector, the
2008 outlook for the U.S. economy is now significantly weaker than at the
time of the October MPR.

For Canada, the effects of the weaker U.S. economic outlook will lead to
additional downward pressure on export growth. However, despite tighter
credit conditions, domestic demand in Canada is projected to remain strong.
This strength is supported by continued income growth associated with the
increase in commodity prices since October, which has led to further gains
in our terms of trade. Overall, the Bank now projects weaker growth in 2008
than was expected in October, with the economy moving into modest excess
supply in the second quarter of this year. Somewhat stronger growth in 2009
brings the Canadian economy back into balance in early 2010. The inflation
projection has also been revised down since October, especially for 2008,
primarily reflecting the price-level adjustment noted above and the recent
one-percentage-point cut in the GST. Both core and total CPI inflation
should fall below 1 1/2 per cent by the middle of this year before returning
to the 2 per cent target by the end of 2009. On the whole, the Bank judges
that the risks to this inflation projection are roughly balanced.

In line with this outlook, the Bank has decided to lower the target for the
overnight rate and further monetary stimulus is likely to be required in the
near term to keep aggregate supply and demand in balance and to return
inflation to target over the medium term.

The Bank’s detailed projection for the economy and inflation, and risks to
the projection, will be published in the Monetary Policy Report Update on 24
January 2008.

Your record of payment on previous and current obligations. Lenders may enquire about your record at the appropriate Credit Bureau.

The only significant item that does not usually appear on the credit report is how well you’ve made any mortgage payments in the past. If you have recently had a mortgage, the lender will call the previous mortgagee (lender) directly to confirm your history. This is called a "mortgage rating."

Income

Lenders require that you pay out no more than 27% to 35% of your provable gross income on all shelter costs. This is known as the "Gross Debt Service Ratio."

You may have other debt, of course, but in combination with shelter costs, the total of all regular payments should not exceed 37% to 42% of your income. This is the "Total Debt Service Ratio."

Down Payment

At least 5% of the value of the property in the case of a purchase, (with a default-insured mortgage), should come from your own savings.

Job Stability

Quite a separate issue from the amount and type of income is "how stable is the flow of income?" While exceptions are usually made, lenders generally look for several years in the same company, or progressive income increases in a succession of related jobs.

This is a one-time insurance premium you pay when buying a home with less than 25% down payment, or in a few other situations where a lender is not willing to take all the risk of lending you money. Some examples of this might be:

• a non-standard dwelling such as a mobile home on leased land.
• a rural property with non-standard utilities (well and septic systems).
• a multiple-unit dwelling where you may or may not be occupying one of the units.

Insurance premium is standard, and on a sliding scale according to the percentage of the property value you wish to finance with this mortgage.

Mortgage Life Insurance

This is simply regular life insurance which is used to ensure that, in the event of the death of either of the borrowers, the mortgage will be paid off in full from the proceeds. Since this is not mandatory, an important question to ask of any lender who offers it is "who is the beneficiary?". If the lender is the beneficiary, it can be used by them to retire the mortgage in full…which may not be the survivor’s desired course of action, particularly if the mortgage is at a much lower rate than the survivor can earn after tax on investments. Mortgage Fire Insurance

All lenders, without exception, require that a fire insurance policy be in effect at the time they fund a mortgage…for the obvious reason that if an uninsured house burns down on a property they have mortgaged, the only remaining value is in the land. While this may not actually cause a loss directly, (due to the high value of many lots) the funds will be unavailable to reconstruct the building, and thus force a sale or re-mortgaging.

Mortgage Payment Protection Insurance

In recent years, it has become possible to buy income protection insurance specifically to ensure mortgage payments can be maintained in the event of not only disability (now a standard product), but also loss of employment.

Often the selection of a first home is a chance event…
friends are selling their condo and will give you a great deal if you buy from them privately.

• you drop into a new home sales office and "fall in love" with a particular model, not to mention the charming sales pitch of the well-practiced salesperson.
• your realtor comes across the perfect little semi…and suggests you snap it up quickly "before someone else does".

The point is…there are a lot of selling forces out there…you should assert your right to evaluate the options yourself, and then make an informed choice. To assist in this evaluation process, following is a comparison of some of the Pro’s and Con’s of the different choices.

	Condo/Freehold Townhouse
PRO	Lower purchase price than semi or detached. Lower taxes. Lower maintenance effort. Better re-sale market than condo apartment. Some important backyard activities possible…barbecues, sandbox, swings.
CON	Hardest to re-sell. Usually harder to re-sell than semi or detached home. (depends on market) Usually not as much value appreciation as semi or detached. Don’t own the land. (unless freehold Townhouse) Shared wall(s) and close to neighbours – acceptable as long as neighbours are good.

	Semi-Detached
PRO	Good compromise for first time buyer…most privacy at the least cost. You own the land – which is the appreciating asset…bricks and mortar depreciate. Readily re-sold to other first-time buyers – therefore good value appreciation. Easy to finance at best rates. Many family and entertainment activities possible – yard usually bigger than a Townhouse.
CON	A common wall – acceptable if neighbours are good, but no control over changes. A higher price per square foot of living space than a townhouse in a similar location.

	Detached
PRO	You own the land – the appreciating asset. Value appreciation is usually best for detached because the greatest number of buyers "aspire" to a detached property. No common walls, allowing the greatest privacy. The most prestigious – you are seen as having "made it" by friends and family. Lower priced detached homes tend to sell quickly because of the combination of prestige and affordability.
CON	The cost is the highest of all options – both purchase price and property taxes – for similar locations and quality.

Summary
ISSUE	CONDO APT	CONDO	SEMI-DETACHED	DETACHED
Purchase Price	Lowest	Low	Medium	Highest
Taxes	Lowest	Low	Medium	Highest
Maintenance Effort Required	Lowest	Low	Medium	Highest
Maintenance Cost	High	High	Lowest	Medium
Re-Sale Market	Worst	Limited	Best	Good
Financing-Low Down payment	Worst	Good	Excellent	Excellent
Family/Entertainment Activities (BBQ etc.)	Poor	Good	Very Good	Excellent
Value Appreciation	Poor	Medium	Medium	Best

	Re-Sale Home (vs. New from Builder)
PRO	Price is lower because of some wear and tear. (which varies greatly – check closely!) You get the benefit of upgrades (finished basement, pool etc.) at a depreciated price. Established neighbourhood..current neighbours/ other variables are a known quantity.
CON	The home has been used by others. There is no "warranty" for major repairs required by law, although it can be specifically arranged. You often inherit someone else’s taste in decorating, which can be expensive and time consuming to change at retail prices.

	New Home from Builder (vs. Resale)
PRO	You are the first occupants…the house is an empty canvas for you to add your touch. Priced lower than new homes in similar recently completed subdivisions…appreciates as soon as construction is 100% complete. You can choose colours, design features to your own taste as an inclusion in the purchase price, with upgrades negotiable. There is usually excellent protection from defects in construction required by Provincial Law.
CON	There is often an extended period of time without lawns or paved driveways, and with dust from unsodded areas and construction traffic. There can be problems with permits or trade strikes that prevent timely completion and occupancy. Some closing costs apply to new homes that do not exist with resales.

Up to two partners in the home can combine their RRSP’s for a total maximum of $40,000. The only subsequent requirement is that they pay the withdrawals back into their plans (without further deductions) over a maximum of 15 years. Failure to do so will result in 1/15th of the RRSP initially withdrawn having to be added back to taxable income in any year the minimum re-deposit is not made.

One very good feature of the HBP, exploited by several of the major financial institutions (usually in cooperation with major Real Estate chains), is the ability to borrow money to top up your RRSP plan using accumulated RRSP eligibility limits. If your tax assessment notice indicates you are eligible for, say, $18,000 in contributions in the current year, and you already have $4,000 in a self-directed plan, these institutions will lend you – subject to a credit check – the $16,000 to buy the RRSP required to bring you up to the $20,000 HBP limit. You may wish to borrow the whole $20,000 to obtain the maximum tax deduction.

A loan for the RRSP to be used as your down payment allows you, in effect, to borrow your down payment over the next 15 years.

The idea is then to claim the eligible deduction against your current year’s income in order to get a large tax rebate. This rebate can then be used either to pay down the loan, or applied to the cost of buying the home. Here, of course, the amount of tax you’re paying each year is an important factor. If the $16,000 deduction in this example results in, say, a $5,000 tax rebate, then that’s all the "free cash" you actually net from the process.

If, on the other hand two partners each earning $80,000 per year take their maximum RRSP of $20,000 each in the current year, they could net $15,000 or more "free cash" in total.

You are then allowed to withdraw up to the $20,000 maximum from the RRSP 90 days after topping up or creating the plan, subject to the re-deposit requirements described above.

Here’s the catch for those thinking of borrowing the money for the maximum RRSP: Unless you’re planning to repay the RRSP loan quickly, or are able to extend the terms significantly this has the effect of greatly increasing the monthly payment, thus decreasing the chances of qualifying for a mortgage because of much higher "total debt servicing ratio". This is the proportion of your gross income required to service both the home related costs and other monthly obligations – usually a maximum of 42%. Another $600 per month could well make the difference in whether or not you’ll qualify for a mortgage.